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Tesco cuts dividend amid price war

The price war raging in Britain's supermarket aisles forced Tesco into drastic action today following another damaging warning over annual profits.

The ailing market leader is to slash its dividend for shareholders by 75% and has pledged an annual cut of £400 million on capital spending such as store refits as it feels the heat from its third profits warning this year.

Former Unilever executive Dave Lewis will now start work as chief executive on Monday - a month earlier than planned - with the immediate task of reviewing "every aspect" of the group's operations.

Tesco shares slumped 8% at one stage to an 11-year low, with rivals Sainsbury's and Morrisons also down sharply amid fears that they are facing a costly new phase in the supermarket price war.

Analysts predict that even bigger price cuts are in the pipeline as Tesco prepares its fightback after being squeezed by the growth of discount rivals Aldi and Lidl and the impact of tighter household budgets.

Cantor Fitzgerald's Mike Dennis said the dividend cut and other cost savings could give Tesco £1.3 billion of cash to invest in price and put its main competitors in "considerable margin pain".

He added: "Tesco's investment in margin and recovery plan could easily wipe out the majority of its main competitors' trading margins, forcing them to reduce their dividends and capital expenditure and also forcing the discounters back to a loss-making position, as they were in 2009."

Mr Lewis takes over from Philip Clarke, whose departure from the retailer he joined 40 years ago was brought forward in the wake of today's warning.

His strategy was based around a store refresh programme, but capital expenditure has now been reduced to no more than £ 2.1 billion this year - a cut of £600 million on the previous financial period. In 2008-09, when Tesco dominated rivals by building more retail space, spending was £ 4.7 billion.

Mr Clarke succeeded Sir Terry Leahy as chief executive in February 2011, but at the start of the following year Tesco shocked the market with its first profit warning in almost 20 years after poor Christmas trading.

It prompted the launch of a £1 billion turnaround plan but latest annual results showed earnings down for the second year running.

Tesco chairman Sir Richard Broadbent said: "The board's priority is to improve the performance of the group. We have taken prudent and decisive action solely to that end."

He added that the dividend cut was necessary in order to retain "a strong financial position and strategic optionality".

Tesco's trading profits for the year to April are now likely to be between £2.4 billion and £2.5 billion, well below City forecasts of around £3 billion and down on the £3.3 billion reported the previous year.

The cut to its dividend will be a blow for many UK pension funds but represents a saving of £280 million from the half-year payment alone.

The company said today: "The combination of challenging trading conditions and ongoing investment in our customer offer has continued to impact the expected financial performance of the group."

Earlier this week, industry till-roll figures from Kantar Worldpanel showed that Tesco sales were 4% lower in the 12 weeks to August 17 as its market share slid to 28.8% from 30.2% a year earlier.

Clive Black, a retail analyst at Shore Capital Stockbrokers, believes Mr Lewis will have to step up investment in pricing in order to arrest Tesco's decline.

He added: " We expect, as part of a range of measures, considerable senior management change under Mr Lewis, as Tesco needs a world-class top team to take it forward."

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